The molecular mechanism of signal transduction that regulates embryonic hematopoiesis is poorly understood. Shp-2, a cytoplasmic tyrosine phosphatase that contains two SH2 domains, participates in signaling downstream of cytokine receptors. Using a gene targeting approach, we have created a Shp-2 mutant allele by deleting amino acids 46-110 in the N-terminal SH2 domain. Mice homozygous for this mutation die in utero at mid- gestation with defects in posterior development and organization of axial structures. Our in vitro ES cells differentiation experiments suggest an important role for Shp-2 in erythroid and myeloid cell differentiation. On this project, we will center our focus on dissecting the Shp-2 function in the hierarchial development of hematopoietic stem/progenitor cells. My specific aims are: 1). to determine the role of Shp-2 phosphatase on the commitment of a common precursor for hematopoietic and endothelial cells and to uncover the alteration of cellular responses to cytokines by the Shp-2 mutation during hematopoietic cell differentiation; II). to examine the effect of the Shp-2 mutation on both the hematopoietic stem cells and the microenvironment in blood forming tissues in vivo, using chimeric animals containing Shp-2-/- cells; III). to specifically assess the involvement of Shp-2 in T and B lymphocyte development using the RAG-2 complementation system and to dissect the unique function of Shp-2 in lymphocyte signaling; IV). to reconstitute the developmental program of blood cells in Shp-2 mutant ES cells and to elucidate the molecular basis for Shp-2 function in mediating blood cell development; V). to isolate and characterize another ES cell line with an Shp-2 null mutation. This study will provide fundamental insight into the role of a tyrosine phosphatase in cytoplasmic signaling pathways that control the commitment, differentiation and survival of hematopoietic stem cells.